What is it like to live during a formative change in humanity? I think the answer is much like it is today. After a tip off to read Book III of Adam Smith’s The Wealth of Nations, and reflecting some upon Weingast’s interpretation of the role of violence in the historical development of modern Europe. The rhyme that I see is in the relative equilibrium we’ve had with modern governance to that of the equilibrium that existed in feudal Europe and the shocks that we are seeing with Bitcoin and the shocks of emergent trade in the coastal towns of Medieval Europe. I am not a historian, and have not read a great deal on this subject, and as such invite any comments and feedback that you may have. Continue reading →

Ideas come and ideas go. And some ideas, you just can’t shake. For about a year, I’ve been working on sketching out a framework for how to use contracts based on Bitcoin (capital B is the protocol). I call them bitcerts. Unfortunately, I have only rudimentary coding ability, and the bitcert remains a theoretical construct. I came across this article on twitter (HT Jon Waller) about Ethereum. This appears to have the attributes needed to create contracts. The uses they have (stocks and derivatives and such) are only really the tip of the iceberg. The big Kahuna is actually the ability to make contracts… It is the non financial contracts that are perhaps the most important, and this will be the bulk of the discussion here.

A week ago I was on vacation with my family and was rather depressed about the extent of the NSA spying, as revealed by Der Spiegel and discussed by Jacob Applebaum (@ioerror) in his To Protect and Infect, Part 2 presentation at the 30c3 conference. If you have not seen it watch it! Stop reading this post and watch it. You will not feel sufficiently violated until you do and my perspective will seem like that of a clueless crank. While I may be both, on this issue I am and as you will be sufficiently justified in our anger.

Alt-Market posted a critique about Bitcoin that I thought was myopic and missed the key attributes of the protocol and currency and the movement that surrounds it. Please read the original here.

My comments,

Bitcoin’s Origin and More

I want to address a key point in your critique of bitcoin, our lack of knowledge of who Satoshi Nakamoto is. You are right to assert that this individual or group of individuals could be a member of the establishment. This is not important. There are two things that are important. First is that participation is voluntary, second is that Bitcoin’s constitution (source code) is publicly available. If one were so inclined, you could sit down, read, and understand how the code operates. The rules are patent. If the rules change, then there is a risk that not all members will stay with bitcoin and it will fork into multiple branches.

This brings up another point that you discussed, that of non exclusive nature of crypto currencies. Yes any Joe Schmo (whomever that is) off the street can sit down and implement their own version of a cryptographic currency. The cat is afterall out of the bag. This is a tremendous advantage. This means that there is and will always be competition to find which protocol is the best. This allows each new and existing currency to copy features from one another. This includes Bitcoin, as development has not stopped. There is a part of Bitcoin that cannot be duplicated and that is the established network. This is the part that takes the most time to grow and develop. What is beautiful about this is that this process is entirely emergent and is what makes Bitcoin robust.

As for me, I am an engineer and Navy vet. I own many firearms. I reload my own ammunition. I own gold, silver, and bitcoin. I have a stash of cash too. I am not afraid to defend my rights or the rights of those around me from others. I also abhor violence. None of these attributes makes me ideal. I am a product of my own experience. There is no one way to exemplify Liberty. Liberty is about plurality. It is about having many different views with some ideas being coincident and others not. Liberty is about respecting and allowing another’s viewpoint to exist and allowing my own. Liberty is more about acceptance. For those kids who have not been scared by violence, having to fight and kill, I hope they never have to experience the pain it takes to get those scars. I remember very distinctly the moment I accepted my need to kill another human being and acted accordingly. Demanding that as a prerequisite for defining a liberty movement is overly narrow and misses the purpose of Liberty. Liberty is not about violence, nor does it exclude violence.

As for what happens if the world goes to hell, how do you know that the network at some level will not be maintained? One of the most important aspects of warfare is to maintain as much infrastructure as possible. While it enables the enemy, it also enables you. This saved many bridges in countless wars. It is where we get the saying about burning bridges. The internet is such a network, but only more so.

Many of the cypherpunks that you readily deride are engaged in active warfare on the internet. In case you weren’t aware the NSA overran our camp while we were asleep. These few vigilant sentries are trying to reorganize our efforts and take back our camp. War is fought on many levels. As we speak there are partisans fighting statism on the web. They are in a fight that by your statements here, you do not understand as a fight.

I had a random idea a while back and decided to chase it down. I saw that Gibbs method of statistical mechanics relies on operations of certain distribution functions, like the Gamma distribution or the Normal distribution. In my work I kept on coming across the Log-Normal distribution. It is everywhere. So I decided to have a look and see what I could derive. While I did this for the Log-Normal and Gibbs did it for the Gamma and Normal distributions, this approach is applicable to any other distribution.

Theory is no good unless you can test it and see it in our data. So I tested it on income distributions, reported in the the attached paper, bitcoin transactions (work in progress), and radiation exposure to cells (unreported work).

In my work, I derived the Cobb-Douglas function as a property of the Log-Normal distribution. Yesterday a friend tweeted a link to a blog The entropy of nations. If you have not read it I suggest you do. The author identifies maximum entropy as Adam Smith’s “invisible hand”. I emphatically agree with his analogy. The tendency towards maximum entropy is seen in the process of price discovery it is the invidible hand that drives arbitrage.

His work motivated me to finish mine and with a boring and non descriptive title to boot! Various Properties of the LogNormal Distribution. Can you say math fun? The policy stuff is in the last section if you are so inclined and the mathy stuff is in the front two sections. I found income distributions obey the second law of thermodynamics. This is great news! The bad news and what inspired my evocative title is that while we can propose policy and develop theories that say it will work, that no quantity of ink or PhD’s is going to change the second law. If you are not aware that it applies, so well. There is a chance you got the theory right, but its just not very likely. I had a Commanding Officer tell me, “Cal, Hope is not a plan. A plan is a plan.” Wise words. He left out that my plan actually better be possible. Hope as a policy is wishing for unicorns. That is my best description of any progressive policy, wishing for unicorns. It explains why what we get isn’t what we were sold. Somewhere along the line reality hit.

Here to any progressives that follow me or stumble across this blog, there is my gauntlet laid at your feet. I invite your responses.

I looked at the distribution of transactions of 1 hour of the block chain (269609 to 269618). I parsed the blockchain into two sets of transactions: originating and receiving addresses. I examined both sets independently and together, attempting to fit the three different trials to Gamma distributions. The receiving addresses proved to have the easiest to interpret set of data, and did not follow a Gamma distribution. Instead, the receiving transactions followed a Log-Normal distribution. Figure 1 shows the results of the data and the resulting fit. The data in figure 1 was parsed into blocks that are 2dB wide (every decade of transactions size is 5 bins, the first bin is BTC, 1BTC is the 30th bin)

Theft is a strong word. It requires two things, desire and a lack of consent. One party desires something from another and takes it without their consent. Simple. My current project is developing an understanding of macroeconomics based on a formal aggregation of microeconomics. I did not anticipate the understanding that I found. This last weekend I worked on understanding claims against wealth inequality. I began by looking at the distribution of income derived form the Average Wage Index (AWI) from 1990-2012. Plotted on a Log-Log scale the distribution appeared to follow a canonical distribution Figure 1.

Figure 1 distribution of wealth (# people/$ v. income) in United States (2012)

There has been some discussion in the news about inflation. Japan is actively pursuing inflationary policy with the Yen. The Federal Reserve is not backing off of its Quantitative Easing, taper-off. Meanwhile, India is is watching their currency collapse. And the ECB just announced a surprise lowering of their interest rates. One of the hallmarks of modern economic theory is the stimulatory nature of increasing consumption now. This is financed through two mechanisms, debt and increasing the monetary base. The root of the dual mandate of the Federal Reserve is that inflation as shown by the Phillips Curve causes higher employment. This is dangerous policy. Here is the math explaining why. Continue reading →